Employee training needs and perceived value of training in the Pearl River Delta of China
A human capital development approach
The Authors
Alan Kai Ming Au, The Open University of Hong Kong, Kowloon, Hong Kong
Yochanan Altman, ESADE, Barcelona, Spain
Josse Roussel, University of Paris-Dauphine, Paris, France
Acknowledgements
This paper was written during Dr Altman's tenure as Visiting Research Professor with the Institute of Labor Studies, ESADE, Barcelona.
Abstract
Purpose – This paper aims to explore Hong Kong firms' training needs in the Pearl River Delta, a booming region in the fast growing People Republic of China economy, by resorting to a human capital approach. Also, to identify the training policies selected by those firms in order to cater for those needs.
Design/methodology/approach – A survey based mail questionnaire was sent to a large sample of Hong Kong firms (mostly SMEs) operating in the Pearl River Delta area. The questionnaire was designed in two parts: the first asked close-ended questions about firm characteristics, knowledge needs of staff and recruitment policies; the other enquired about preferences for study training programs. Results are analyzed employing an Anova and Conjoint Analysis within the context of a human capital framework.
Findings – Finds that Hong Kong firms investing in PRD recruit their senior staff from Hong Kong, whereas junior and intermediate level staffs are hired from the Mainland. It also shows that intermediate and senior level staff benefit from most of the training investments, where unskilled are deprived of training altogether.
Practical implications – Obtains a practical insight on human capital management policies by foreign investors in fast-growing emerging economies.
Originality/value – Provides an innovative study of an under-researched area in the fastest growing region of the People Republic of China.
Article Type:
Research paper
Keyword(s):
Employees; Training needs; Human capital; China; International investments.
Journal:
Journal of European Industrial Training
Volume:
32
Number:
1
Year:
2008
pp:
19-31
Copyright ©
Emerald Group Publishing Limited
ISSN:
0309-0590
Introduction
Human capital development in its context
Human capital has gained a place in contemporary scholarship and business practice, explicating economic progress and individual wellbeing at both national and firm levels (Shultz, 1961; Becker, 1975). The originality of these seminal economists' research was two-fold: first, in regarding education not as consumption goods but rather as an asset worthy of investment; and second, by developing an analytical framework to assess the return on investment in education. By investing in education and training, an individual will develop her human capital, that is, her skills and knowledge, which will allow her to hold better paid jobs. Investment in education and employable skills therefore emerged as a key component of human capital deployment, whether initiated by the state, the company or the individuals themselves (Mincer, 1974). Accordingly, we treat human capital development in this paper as a multifaceted socio-economic-political phenomenon, conscientious that such returns on investment are neither homogeneous nor unidirectional as Denny et al. (2001) demonstrated in the case of the European Union.
An individual's human capital can be best defined by knowledge and skills built up throughout schooling, higher education, vocational training and work experiences (De la Fuente and Ciccone, 2002). Within a firm, one individual's human capital is linked and contributes to developing both organizational capital – collective competences, organizational routines, company culture; and relational capital – trustworthiness with regards to customers, suppliers and investors (Edvison and Malone, 1997).
Since human capital is best defined, within a company, by the knowledge mastered by individuals, evidently human capital encompasses different categories. Conventionally, three kinds of human capital are distinguished: generic (general) human capital, firm-specific human capital, task-specific human capital (Gibbons and Waldman, 2004; Hatch and Dyer, 2004). General human capital is defined by generic knowledge and skills, not specific to a task or a company, usually accumulated through working experiences and education. In contrast, task-specific human capital is mostly built up by vocational training and embedded working experience. As to firm-specific human capital, it is mostly accumulated on the basis of a body of knowledge specific to a firm.
Investment in human capital
Bartel (1991) and Lynch and Black (1995) demonstrate that vocational training increase a firm's productivity. However, the appraisal of vocational training rate of return is controversial since empirical studies provide mixed results. Nevertheless, most economists acknowledge that a high human capital stock within a company resulting from a sound training policy is a major source of innovation and competitiveness. Lucas (1988) sheds light on the positive impact of education on workers productivity within a macroeconomic model. On a microeconomic level, the rise of new production and management technologies entails better qualified workers and managers which in turn requires the improvement of their skills.
The impact of human capital on the productivity of the firm is all the more relevant at the higher level of the organization (Welch, 1970; Pack, 1972). Griliches and Regev (1995) show how human capital significantly impacts productivity: firms endowed with a high quality human capital are more productive. Bartel and Lichtenberg (1987) and Booth and Snower (1996) link the level of human capital with deployability of new technologies leading to higher productivity gains.
Human capital: some controversial issues
The central hypothesis of human capital theory assumes that the higher the productivity of a worker the higher her wages. Therefore, wages discrepancies are the result of differences in human capital levels accumulated over time through training and experience.
As a result, the following causality ensues: investment in human capital through education and training develops the human capital level of a worker which entails a rise in her productivity which in turn will lead to higher wages.
However, this causality rests on the fundamental neoclassical assumption according to which workers are paid to their marginal productivity in a competitive labor market with little “frictions”. Since labor markets are very different from perfectly competitive markets, the causality between human capital, productivity and wages might be challenged. As a matter of fact, most labor markets in industrialized and emerging nations do differ from competitive markets for several reasons: labor markets are usually highly regulated, transaction costs are high given the cost of the recruitment procedure, and there are a lot of information asymmetries regarding the relevant wages.
The link between human capital and productivity is also challenged by signaling theory (Arrow, 1973; Spence, 1974; Stiglitz, 1975) and efficiency wages theory (Alchian and Demsetz, 1972; Lazear, 1981; Akerlof, 1982) though on different levels.
Signaling theory assumes that the employer faces strong uncertainty regarding employees' productivity. Education, and especially the level of degrees, will be used as a signal of workers' productivity so as to reduce the information asymmetry. Education as a signal will allow the firm to select the best-suited employees. There are other signals that can be used such as age, sex, former professional positions. However, education is perceived as the most reliable one.
According to the efficiency wages theory approach the link between productivity and wages is strong as posited by human capital theory. However, the two theories disagree on the causality between productivity and wages. For human capital theory the causality goes like this: investment in human capital will lead to an increase in workers' productivity which will amount to higher wages in a competitive labor market. The causality link is reversed in efficient wages theory: so as to provide employees with stronger incentives, firms will increase wages entailing a productivity rise. In the efficient wages approach, employees will work harder and increase their productivity because they are given incentives through higher wages. Thus, according to Lazear (1981) there is no need to resort to the assumption of growing productivity to account for the correlation between seniority, and the growth of on-the-job knowledge – one of the components of human capital – it entails, and wages. High seniority workers are better paid not because they display higher productivity but because it gives younger employees strong incentives to work harder so as to secure their jobs and consequently gain seniority and better wages. Therefore, granting senior workers higher salaries is a rational wage policy not because they are more productive given a higher-level human capital, but because of the strong incentives to work harder that this very policy provides to younger employees. By working harder, the junior staff will increase its productivity level.
Research questions and research objectives
Given this intimate relationship between training investment, human capital appreciation and productivity predicated by scholarly discourse, what does the reality on the ground look like? Whilst most of the extant knowledge has been derived from and relevant to developed economies, what is the situation in developing economies? How is the human capital infrastructure developed and maintained in developing economies?
The People Republic of China's (PRC) economy poses a challenge to any theorist or practitioner in the social sciences, given its unparalleled sustained growth over the past three decades, making it presently the fourth largest economy in the world and projected to become the second largest by 2030 (Lehman Brothers, 2005). Its main growth engine has been the private sector, which runs on market capitalist principles of profits driven private equity and ownership, alongside the state sector, predicated on socialist centralized command economy principles. This mixed economy model has been characterized as Market-Leninism: an “alliance to both market economics and Leninist political principles” (Kristof and Wudunn, 1994, p. 431). A key driver of the private sector has been direct foreign investment, either wholly owned subsidiaries or joint ventures. It is these foreign investors' position on human capital development that is the focus of our interest here.
To investigate this issue in a real life context we aimed to examine an entire region of the People's Republic of China: the Pearl River Delta (PRD). The PRD covers nine prefectures of the Guangdong Province, namely Guangzhou, Jiangmen, Shenzhen, Zhuhai, Dongguan, Zhongshan, Foshan, Huizhou (specifically Huizhou City, Huiyang, Huidong, Boluo), and Zhaoqing (specifically Zhaoqing City, Gaoyao and Sihui), as well as the Special Administrative Regions of Hong Kong and Macau. It is the most dynamic economic region of China. Fast growth can be largely attributed to direct investment flowing in from Hong Kong and Taiwan manufacturers since the “open door” policy; and European and American continuous foreign investment adding to this growth. The average annual real GDP growth rate of PRD for the period 1990-2002 was 17.4 percent compared to China's overall growth rate of 9.7 percent (www.thegprd.com/about%5Ceconomic.html).
We decided to confine the study to investments from one particular origin, as a way of controlling for geo-political variance, namely investments emanating from Hong Kong, which enjoys in the PRC a special administrative status. Hong- Kong companies have a strong presence in the region, with nearly 30,000 firms claiming to have investments in the PRD
The following research questions were posited:
RQ1. What are the declared knowledge
RQ2. What is the preferred mix of training provision to cater for these needs?
Method
A mail questionnaire survey was carried out to collect information on employers' views about knowledge and skills training needs.
The sample
Given the lack of availability of neither firm population statistics, nor company directories for the region, a convenience sampling method was adopted for data collection. The Trade and Development Council (TDC) in Hong-Kong database as of March 2004 had 29,496 Hong Kong firms which claimed to have investments in the PRD. Of these, 5,146 firms were selected as the sample for this survey with the following criteria:
- All firms with over 50 employees on the mainland (a total of 1,600 firms).
- percent of firms, drawn randomly from the TDC database, with between 11 and 50 employees on the mainland (a total of 3,546 firms).
- All firms with ten or less employees on the mainland were excluded from the survey.
The questionnaire
A questionnaire was sent to these 5,146 firms in April 2004 with a covering letter advising participants that these should be filled by senior level staff responsible for the HR function and assuring that all data be kept strictly confidential. Two rounds of follow-up reminders were sent out to all participants.
The questionnaire consisted of two parts. Part A asked eight close-ended questions that were organized in a general to specific flow. The first three questions asked general firm characteristics information, including mode of investment, primary function and firm size. Questions 4 and 5 enquired how firms recruited their staff and whether they were currently recruiting. Question 6 enquired about the knowledge needs of staff at various position levels. Question 7 asked respondents how satisfied they were with their staff's knowledge. Question 8 related to the skill-based training needs of their staff at various position levels.
Part B comprised a conjoint analysis. A total of 32 statements were displayed, each describing a study/training program with different attributes at different levels. Respondents were then asked to evaluate these stimuli in terms of their suitability and perceived monetary value. The computation procedure converts these evaluations into part worth scores for each attribute and at each level.
Of the 5,146 mailed questionnaires 537 filled questionnaires were returned of which 338 firms indicated that they have investment in the PRD, (hence, 37 percent of replies were not useable due to erroneous information in the first place). The response rate was lower than average returns for mail surveys to organizational representatives in academic studies (Baruch, 1999), and more in line with the expected return from large scale academic market research studies, such as the Crannet studies in Human Resource Management (e.g. Brewster and Larsen, 2000). The sample firms provided a good spread in terms of size, comprising 28.3 percent small firms, 23.6 percent medium-size firms and 48.1 percent large firms.
The data collection was completed in June, 2004.
Findings
Sample characteristics
In line with the region's economic strength the majority of the sample firms were manufacturers. Manufacturers accounted for over 70 percent of the sectoral distribution. The second largest sector of our sample was import and export trade, accounting for another 8 percent of the sectoral distribution. The rest of the remaining sectors were small with each accounting for less than 5 percent of the sectoral distribution, including: construction, professional services, IT & telecommunications, catering, logistics & transport, storage services. Most companies were wholly owned investments (59 percent), followed by joint ventures (16 percent), foreign cooperative operations (10 percent) and other modes of investment (15 percent).
Data analysis
ANOVA and conjoint analysis were conducted in this study. The following four attributes and levels were used for the conjoint analysis:
- The country (or place) of origin of the training provider (Level: China, Hong Kong, Overseas).
- Level of qualification (Level: training, degree, master, PhD).
- Study mode (Level: face-to-face, distance learning).
- Subject discipline (Level: language, information technology, international business, logistics, marketing, management, accounting and finance, environmental management).
The above attributes and levels result in 144 (3x3x2x8) possible combinations. To reduce the large number of variables, a fractional factorial design was employed that produced 32 combinations overall.
Recruitment channels and needs
Overall, our sample firms recruit their senior level staff from Hong Kong, junior and intermediate level staff from the Mainland. Figure 1 shows that the curves for sufficiency of staff are leaned to the left, suggesting that the sample firms have sufficient staff. A “1 to 6” scale is used to measure the sufficiency of staff where “1” represents “very sufficient” and “6” represents “very insufficient”. Thus, a “3.5” serves as a reasonable cut-off between sufficiency and insufficiency. The mean sufficiency scores are 2.85, 2.88 and 2.34 for the senior, intermediate and junior level staff, respectively. The statistical test
Knowledge needs (overall)
The mean scores of knowledge needs for senior, intermediate and junior staff are 4.61, 3.96 and 2.72, respectively. Again, this question is on a “1 to 6” scale where “1” represents “Not at all needed” and “6” represents “Needed very much” and a “3.5” serves as the cut-off between “Needed” and “Not needed”. The computed means suggest that perceived knowledge needs of junior staff are low.
Knowledge needs by subject disciplines
Figure 2 shows the knowledge needs by subject disciplines and by the staff's positions. It is observed that typical senior or intermediate level staff are expected to possess knowledge in all branches of knowledge. For senior staff, the order of importance among these subjects is Management, Marketing and Language. For intermediate level staff, the order of importance is Management, Language and Marketing. As mentioned, the overall perceived knowledge needs of junior staff is low with possibly the exception of Language.
Satisfaction with staff's knowledge
The satisfaction scores for senior, intermediate and junior level staff are 3.75, 3.19 and 2.70, respectively. Using 3.5 as the cut off between “Satisfied” and “Dissatisfied”, these scores indicate that the respondents are only satisfied with the knowledge level of their senior staff.
Skill-based training needs (overall)
The mean scores of skill-based training needs for senior, intermediate and junior level staff are 4.59, 4.06 and 2.8, respectively. Thus, it seems that the higher the position of staff, the perceived needs for training is higher. Using 3.5 as the cut-off point, the perceived skill-based training needs of junior staff are low.
Conjoint analysis
The survey asked to evaluate 32 selected variables in term of their suitability to fulfill training needs on a scale from 1 to 10. The computational procedure for the conjoint analysis converts the ratings into scores. The computed suitability scores for the following four attributes are:
- (subject discipline);
- (study mode);
- (level of qualification); and
- (the country or place of origin of the training provider);
These scores reveal that level of qualification is the most important and study mode is the least important attribute. Figure 3 shows the suitability scores of attributes at different levels, that is, subject discipline, study mode, level of qualification and origin of provider; and indicates that, within each attribute, there is one most important element. For example, it is observed that training program is the most important attribute among the levels of qualifications. As such, the overall results illustrate that the most suitable study/training program should have the following attributes:
- a face-to-face;
- training program;
- organized by a Hong Kong institution; and
- in Marketing or Management.
In addition, respondents were also asked to evaluate the 32 selected stimuli in term of (perceived) monetary value. The computed scores for the four attributes are:
- (subject discipline);
- (study mode);
- (level of qualification); and
- (the country of origin of the training provider);
These scores
- a face-to-face;
- PhD program;
- organized by an overseas institution; and
- in Language or Information Technology.
Discussion
Human capital development and human capital depreciation
Whilst firms can develop the level of human capital of their employees by investing in a matching training policy, a poorly conceived policy may lead to human capital depreciation (Chassard and Passet, 2005; Nauze-Fichet and Tomasini, 2002). This is an often neglected side of the human capital approach of firms and organizations, yet a critical one given human capital contribution to productivity.
Two major causes of human capital depreciation can be identified: lack of investment in training and “over-qualification” (workers endowed with excessive skills and knowledge in respect to the job they actually hold) (Chassard and Passet, 2005; Nauze-Fichet and Tomasini, 2002). For example, Nauze-Fichet and Tomasini (2002) assessed that “over-qualification” accounts for about 10 to 30 percent of jobs in French firms. Overqualified employees do not have the opportunity to use their skills and knowledge in the workplace which leads to their gradual decline. Furthermore, overqualified workers generally experience frustration because they are neither stimulated nor rewarded to the extent of their abilities. Both phenomena contribute to human capital depreciation and therefore to a decline of the productivity of the firm.
Our study suggests that there is little danger of over-qualification as far as the Hong-Kong firms in the PRD region are concerned. The risk of human capital depreciation on the other hand as result of under investment is real. Whilst the senior echelons are inpatriated from Hong-Kong and because of that perhaps not necessitating (as temporary staff) a training investment, at the other end of the organizational spectrum, the lower ranks are deemed unworthy of human capital investment. One possible explanation is that employers consider their junior staff's duties to be routine and low skilled. The other explanation is that the market is saturated with supply of low skilled staff that is therefore easily replaceable.
Training programs are considered by our respondents as the most appropriate form of human capital investment for their staff. However, at the same time, respondents also consider training programs as having only a very low perceived monetary value. The three most valued subject knowledge areas are Marketing, Management and Languages: all practical skills and targeted to middle level staff – who seem the only ones deserving of a Hong-Kong human capital investment. The concentration of investment at that level can be explained as follows: First, some of those intermediate level staff may advance their career and hold senior staff positions, in which case the transition will be all the more successful if they have been properly trained. Second, the growing requirements of modern business, as new technologies and management procedures become available, entails better trained managers and employees. Hence, middle level staff, the backbone of any organization, are perceived to necessitate training because they may need better skills to hold on to the same level positions – intermediate level – as business complexity progresses.
Whilst senior level staff may not require human capital development and middle level staff are seen as an adequate investment target, it is the low skilled staff who are the “orphans” of human capital development in the PRD. In a wider projection, here is a gap in the Market-Leninist model of economy that cannot be accounted for and that may store competencies disadvantages and spread discontent at the macro level for years to come.
Full-fledged degree versus training programs
Our study clearly suggests that the higher the level of a program, the more valuable it is perceived to be: a PhD program has a higher monetary value than a master's and of much higher monetary value than training programs. At the same time short period training programs are the most sought after. A higher level degree has also an additional attribute for signaling potential, as we learn from signaling theory (Arrow, 1973; Spence, 1974; Stiglitz, 1975). The theory rests on the assumption that a prospective employee's productive skills are very difficult to appraise. As a result, firms rely on educational achievements as a signal of prospective employees' skills (Sakamoto and Kim, 2006). According to market signaling theory, a PhD program will convey a stronger productive skills signal than a master degree. Thus, a PhD program has a higher monetary value. With the same reasoning, an advanced degree has a much higher monetary value than a training program.
This formulation is highly relevant for recruitment since firms suffer from strong information asymmetry with regard to prospective workers. So, when it comes to recruiting, companies resort to educational achievements as a signal of prospective workers human capital. As for staff already in post, firms have a lot more information and can therefore properly assess staff's skills and abilities. Training programs are therefore deemed best suited to develop employees' human capital: those programs can be designed to fit employees' job specific training needs.
Human capital policies
Hong Kong firms operating in the PRD demonstrate a highly differentiated human capital policy. While intended human capital investment in low skilled staff is minimal, intermediate and senior staff are deemed appropriate for such investment. This may well be a reflection of the huge workforce “reservoir” available in rural China that makes low skilled workers easily replaceable. It is also in line with policies adopted by Western market capitalist companies throughout the developed world in mass services industries such as call-centers, hotels and restaurants (Autier, 2006). Indeed, not unlike our case here, these Western companies also display a different human capital policy with regards to intermediate and senior staff that cannot be regarded as easily replaceable. In such event, firms often choose to invest in human capital by fostering the development of firm-specific human capital (skills and competences specific to a given firm) and task-specific human capital (skills and competences specific to a given task) so as to foster competitiveness and innovation, but at the same time make the new attained skills less transferable than fully acquired degree programs, thereby encouraging retention. Hong Kong firms in the PRD seem to adopt this human capital development strategy by showing preference for training programs, in lieu of the higher valued degree programs.
Figure 1Staff sufficiency
Figure 2Knowledge needs by subject discipline
Figure 3Suitability of programme to training needs
Figure 4Perceived values of training programmes
References
Akerlof, G. (1982), "Labor contracts as partial giflt exchange", The Quarterly Journal of Economics, Vol. 92 pp.543-69.
Alchian, A., Demsetz, H. (1972), "Production, information costs and economic organization", American Economic Review, Vol. 72 No.December, pp.777-95.
Arrow, K. (1973), "Higher education as a filter", Journal of Public Economics, Vol. 2 pp.193-216.
Autier, F. (2006), "Vous avez dit: capital humain", Gérer et comprendre, Vol. 85 No.3, pp.63-72.
Bartel, A.P. (1991), “Productivity gains from the implementation of employee training programs”, NBER Working paper No. 3893, Cambridge, MA, .
Bartel, A., Lichttenberg, F. (1987), "Formal employee training programs and their impact on labor productivity: evidence from a human resources survey", The Review of Economics and Statistics, Vol. LXIX No.1, pp.1-11.
Baruch, Y. (1999), "Response rate in academic studies – a comparative analysis", Human Relations, Vol. 52 No.4, pp.421-38.
Brewster, C., Larsen, H.H. (2000), Human Resource Management in Northern Europe: Trends, Dilemmas and Strategy, Blackwell Publishing, Oxford, .
Becker, G. (1975), Human Capital, National Bureau of Economic Research, Cambridge, MA, .
Booth, A., Snower, D. (1996), Acquiring Skills. Market Failures, Their Symptoms and Policy Responses, Centre for Economic Policy Research, Cambridge University Press, Cambridge, .
Chassard, Y., Passet, O. (2005), "Faut-il craindre une pénurie de main-d'œuvre qualifiée", Sociétal, Vol. 49.
Denny, K.C., Harmon, C.P., Lydon, R. (2001), Cross-country Evidence in the Returns to Education: Patterns and Explanations, Centre for Economic Policy Research, London, .
De la Fuente, A., Ciccone, A. (2002), Le capital humain dans une économie mondiale sur la connaissance, Rapport pour la Commission Européenne, Brussels, .
Edvinsson, L., Malone, M. (1997), Intelectual Capital, Realizing your Company's True Value by Finding its Hidden Brainpower, Harper Collins Publishers, Philadelphia, PA, .
Gibbons, R., Waldman, M. (2004), "Task-specific human capital", American Economic Review, Vol. 94 No.2, pp.203-7.
Griliches, Z., Regev, H. (1995), "Firm productivity in Israeli industry 1979-1988", Journal of Econometrics, Vol. 65 pp.175-203.
Hatch, N.W., Dyer, J.H. (2004), "Human capital and learning as a source of sustainable competitive advantage", Strategic Management Journal, Vol. 25 pp.1155-78.
Kristof, N.D., Wudunn, S.W. (1994), China Wakes, Time Books, New York, NY, .
Lehman Brothers (2005), Annual Security Industry Report, The Global Investment Bank, New York, NY, .
Lazear, E.P. (1981), "Agency, earnings profiles, productivity and hours restrictions", American Economic Review, Vol. 71 No.4, pp.606-20.
Lynch, L.M., Black, S.E. (1995), “Beyond the incidence of training: evidence from a national employers survey”, NBER Working paper No. 5231, National Bureau of Economic Research, Cambridge, MA, .
Mincer, J. (1974), Schooling, Experience and Earnings, Columbia University Press, Columbia, OH, .
Nauze-Fichet, E., Tomasini, M. (2002), "Diplôme et insertion sur le marché du travail: approches socioprofessionnelle et salariale du déclassement", Economie et statistique, No.354, .
Pack, H. (1972), "Employment and productivity in Kenyan manufacturing", Eastern Africa Economic Review, Vol. 4 No.2, pp.29-52.
Sakamoto, A., Kim, C. (2006), “Estimating the human capital screening effects of schooling on productivity in US manufacturing industries, 1979-1996”, paper presented at the Population Association of America, 2006 Annual Meeting Program, Los Angeles, California, March 30-April 1, 2006, .
Schultz, T.W. (1961), "Investment in human capital", American Economic Review, Vol. 51 pp.1-17.
Spence, A.M. (1974), Market Signalling: Informational Transfer in Hiring and Related Screening Processes, Harvard University Press, Cambridge, MA, .
Stiglitz, J. (1975), "The theory of screening, education and the distribution of income", American Economic Review, Vol. 65 pp.283-300.
Welch, F. (1970), "Education in production", Journal of Political Economy, Vol. 78 pp.35-9.
Corresponding author
Yochanan Altman can be contacted at: y_altman@hotmail.com